UK economy to expand the most since 2004

Jan 21 | Updated: Jan 22 2007, 06:50am hrs
The UK economy will grow this year at the fastest pace since 2004, powered by consumer spending and business investment, a research group will say. The economy will expand 2.9% in 2007, up from 2.7% last year, according to the Ernst & Young ITEM Club. The group, led by former UK Treasury economist Peter Spencer, uses the same forecasting model as the government.

Surveys show gains in house prices and services accelerated at the end of last year, supporting growth in Europe's second- biggest economy.

Faster expansion and inflation at its highest in a decade led the Bank of England this month to raise the benchmark interest rate for the third time since August, and investors are now speculating on another increase.

" The UK economy enters the New Year in rude health,'' the ITEM Club will say in a statement.

"The Monetary Policy Committee will not hesitate to raise interest rates again if there are more definitive signs of headline inflation pushing up wages.''

Two Bank of England policy makers, Andrew Sentance and Timothy Besley, said last week that inflation, which has exceeded the 2% target for eight months, may cause workers to demand inflationary wage increases.

Wages, including bonuses, rose 4.1% in the quarter through November. Inflation will average 2.5% this year, up from 2.3% in 2006, the ITEM Club will say. The consumer-price index, which reached 3% in December, will return to the Bank of England's 2% target by the end of this year, the forecast will show.

The central bank expects it to fall back to target later this year as energy costs decline. Consumer Spending Consumer spending will expand by 2.9% this year and business investment by 6.5%, the fastest for each since 2004, the forecaster will say.

Those gains will help offset a slowdown in export growth to 0.3% from 10.5% in 2006. Growth in services, accounting for about three quarters of the economy, reached the fastest pace since June 1997 last month, a survey of purchasing managers by the Chartered Institute of Purchasing & Supply showed.